Bad Debt Management

We are living in difficult economic times and entrepreneurs are experiencing shortages on their profit and loss accounts. On top of achieving reduced levels of profitability, businesses face greater difficulties in converting their sales into cash, due to bad debts.

This occurs as the result of the credit restrictions experienced in lending markets, which has lead to an increase in the number of company bankruptcies in Spain. Rises in levels of debtors for banking institutions and the amount of unpaid obligations has generally rocketed.

We would like to consider some of the vehicles available to enable the business to either ensure the collection of debtor balances by financial product means, or to mitigate their existence.

It is the accountant’s job to minimise the impact of bad debts on the business accounts utilising any reliefs available to ensure that the client is not taxed on those transactions which are more likely to remain unrecoverable.

The qualifying criterion relevant to each method of taxation does vary, and consequently care needs to be taken when applying any reliefs.

The criteria for the reliefs available in relation to the different taxes suffered by businesses are summarised below:

In light of the restrictions that may be found with regards to tax reliefs, businesses may also want to explore other tools to enable them to minimise the impact of doubtful debts. There are a number of financial products available, such as:

In Summary

We have explored the potential tax barriers to bad debt relief, and the costs associated with implementing financial products to recover the business’ doubtful debts. Effective collection of debtors should be one of the prime objectives of any business.

There is no point in increasing sales if the business is failing to collect payments in the appropriate manner.

Furthermore, if the business has high levels of debtors it may well find difficulties when the time comes to settle its obligations. The credit terms offered to clients will depend on both the industry and business’ style. However, to speed up debt collection any business should:

  • Start with formalising the credit terms of the company. The more standard the terms are the easier it will be to manage debtors
  • Clarify the credit terms with customers when the order is placed, or the services are agreed
  • Consider the need to request payments on account in advance either partialy or totally
  • Use a direct debit system
  • Ensure there is an effective internal control system to keep track of debtor balances.
  • Stick to the terms. There should be no embarrassment when requesting payment when due. Formalise a standard system of reminders which is professional yet polite.
All the above should be considered general guidelines as each case will have specific circumstances that need to be taken into consideration. One should always consult an accountant before acting on any of the issues covered.

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